Hudbay Minerals Inc (HBM) 2020 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hudbay Minerals, Inc. First Quarter 2020 Results Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, May 15, 2020, at 8 a.m. Eastern Time.

I will now turn the conference over to Candace Brûlé, Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Hudbay's 2020 First Quarter Results Conference Call. Hudbay's financial results were issued yesterday and are available on our website at www.hudbay.com. A corresponding PowerPoint presentation is available, and we encourage you to refer to it during this call.

Our presenter today is Peter Kukielski, Hudbay's President and Chief Executive Officer. Accompanying Peter for the Q&A portion of the call will be Cashel Meagher, our Senior Vice President and Chief Operating Officer; and Eugene Lei, our Senior Vice President, Corporate Development and Strategy; and Interim Chief Financial Officer.

Please note that comments made on today's call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR and EDGAR. These documents are also available on our website.

As a reminder, all amounts discussed on today's call are in U.S. dollars, unless otherwise noted.

And now I'll pass the call over to Peter Kukielski. Peter?

Thank you, Candace. Good morning, everyone. And thanks for joining us. I'd like to start out by saying that I hope everyone has been able to stay safe and healthy during this truly unprecedented time. We've been closely monitoring the rapidly evolving environment and taking steps to protect our people, their families and the communities in and around which we operate while we implement measures to minimize the overall impact of this pandemic on our operations.

I'll go into more detail about our specific actions, including all the work we've done to improve our financial strengths after briefly touching on our first quarter financial and operating results.

Following that, I'd like to take you through highlights of our Snow Lake gold strategy.

Hudbay's first quarter results benefited from a solid operating quarter in Manitoba. Lalor achieved record mine production with an 8% increase over the fourth quarter, averaging 4,632 tonnes per day in the first quarter and exceeding targeted levels. Similarly, the Stall mill achieved superb results this quarter with a 19% increase from last quarter, averaging over 4,000 tonnes per day, which is yet another record quarter for Stall.

Actually, Manitoba combined mill, mine and G&A unit operating costs continued to decline quarter-over-quarter and are currently tracking below the annual guidance range as a result of the company's focus on operating efficiencies and costs normalizing after the successful production ramp-up to 4,500 tonnes per day at Lalor in 2019.

I'm very pleased to see the continued strong operating performance, production and cost control in an environment of increased constraints from COVID-19-related protocols. I'd like to publicly thank the Manitoba team for their strong efforts in achieving these outstanding milestones while adopting -- adapting to this challenging external environment and changing the way they work to keep themselves and those around them safe and healthy.

In Peru, we temporarily suspended mining and processing activities at Constancia after the Peruvian government declared a state of emergency on March 15. The Peru team did a tremendous job in ramping down the operations in a safe and orderly fashion. They actively managed the situation during the shutdown to perform care and maintenance activities, optimize our critical supplies inventory levels and successfully manage the safe movement of people.

The team has also implemented various preparedness planning activities in order to facilitate a quick and efficient ramp up. Prior to the mine suspension, Constancia was achieving targeted mill throughput and unit operating cost performance during the quarter. In addition, the mine continued to ship concentrate up until the day the shutdown commenced. On May 14, we received recognition and approval from the Peru Ministry of Energy and Mines for restart protocols, which I will touch on shortly.

As a result of the lower copper production and sales volumes, coupled with the lower copper and zinc prices caused by the COVID-19 pandemic, operating cash flow and earnings in the first quarter were lower than the previous period. Our financials were also impacted by several onetime items such as the write-down of inventory stockpiles in Peru, resulting from current low copper prices as well as some fixed overhead production costs that were expensed during the quarter rather than capitalized due to Constancia's temporary shutdown. We expect there will be a similar charge for fixed overhead costs during the mine suspension period in the second quarter.

Despite these extraordinary impacts, the business had strong cost performance with cash costs and sustaining cash costs improving over the fourth quarter of 2019. We exited the quarter with $306 million in cash and cash equivalents in addition to $446 million available and undrawn under our revolving credit facilities. We continue to take prudent steps to manage our balance sheet and maintain a strong liquidity position.

In February and prior to the pandemic, we proactively renegotiated the covenants of our revolving credit facilities that included replacing total debt-to-EBITDA with net debt-to-EBITDA to allow us greater flexibility to allocate capital to our low risk, high-return investments in our business this year. This resulted in an increase of $443 million in liquidity available as of March 31.

Subsequent to the quarter, we announced a gold prepaid transaction that generated $115 million in cash proceeds to further improve our liquidity position and prefund the growth expenditures in Manitoba, which I'll describe in more detail shortly. The team has done a tremendous job managing our balance sheet, and we believe we are well positioned to meet our liquidity needs for 2020 and prudently grow our business.

I'd now like to spend a few minutes talking about our business response efforts in the light of COVID-19. Following the onset of the pandemic we began monitoring the situation very closely, and we kicked off our business response planning in January. As the virus outbreak worsened globally, our company-wide crisis response plans were activated in early March as part of our crisis management protocols.

The plans were established based on 2 tiers of crisis response. The first tier is the corporate level with a focus on ensuring overall business stability, continuity and coordination. This includes planning for the possible need to reduce or suspend operations and for the restart of suspended operations as well as appropriately managing the company's liquidity. The second-tier is at the business unit level, where the response plans are developed based on the dynamics and context of the local situation.

Our business units engage with local communities, health authorities, government and other stakeholders in each of our regions. Each of the business units has worked to develop site-specific measures to limit and identify COVID-19 exposure and transmission and maintain a safe environment for its workers and its communities.

Site-specific measures include, but are not limited to, prescreening protocols, quarantine periods for incoming workers, workplace physical distancing protocols, adjustment of work rotation schedules, deferral of certain project activity and working from home for office staff.

These measures will continue to evolve as the status of the state of emergency changes in each of our operating regions, and we adapt our measures to the latest regional health authorities restrictions and guidelines, including reopening protocols.

While we recognize the situation is dynamic, we are extremely pleased with the extensive efforts our sites have taken to mitigate the risks of COVID-19.

In Peru, as I mentioned earlier, the government declared a state of emergency on March 15, which remains in place but issued a decree on May 3, indicating the mining sector would reopen in May. While Hudbay operations remain suspended until May 14, we were able to take several additional measures to ensure an efficient restart. These include mine plan optimization activities, continuous supply chain management to ensure sufficient levels of critical supplies, and logistics and workforce planning initiatives, including successfully completing workforce shift changes during the suspension.

We are happy to report that yesterday, Constancia received approval for its restart protocols and mine restock activities are underway due to proactive ramp up planning.

The mill is expected to reach normal levels over the next week, and we expect to provide an update to Peru's guidance with our second quarter results.

In Manitoba, we continue to operate and ship concentrate and zinc metal despite the pandemic. The leadership team is actively engaging with employees, contractors, local communities and public health authorities to manage the evolving situation and continuously adapt and implement its business response plan. We have also been working closely with various groups within our communities to identify where we can help those in need, and I'll touch more on these initiatives later in the presentation.

Given the strong first quarter operating results, despite the challenging environment, we are affirming our 2020 Manitoba production, operating cost and capital expenditure guidance. Our Manitoba 2020 precious metals production is expected to benefit from the planned mining of approximately 90,000 tonnes from the gold zones as part of stope sequencing in preparation for the restart of the New Britannia gold mill, which will match well with the strong gold price environment.

In Peru, due to the temporary suspension of operations at Constancia and the ongoing uncertainty around in COVID-19, we have suspended our previously issued 2020 guidance. It is important to note that Peru sustaining capital expenditures are expected to be approximately $25 million lower than previously anticipated due to the temporary mine suspension and resequencing of capital activities such as tailings and capitalized stripping.

Growth capital expenditures in Peru related to the Pampacancha community surface rights payment and project development capital have been impacted by the state of emergency. The majority of the Pampacancha growth expenditures will be spent once the negotiations with the land users have been completed and the land has been vacated. Due to the state of emergency, these negotiations have been put on hold, and therefore, the payments have been delayed. And as I already mentioned, now that Constancia has received approval for -- of its restock plans, we expect to update our Peru guidance with our second quarter results.

On May 7, we executed a gold forward sale and prepaid transaction in which we received cash proceeds of $115 million, as I noted earlier. This further improves our liquidity position and prefunds the entire investment for the low risk, high-return New Britannia gold mill refurbishment at attractive terms and a low cost of capital.

Under the prepay, we have agreed to deliver a total of 79,954 gold ounces in 2022 and 2023, which were valued at the gold forward curve prices averaging approximately $1,682 per ounce at the time of the transaction.

The transaction offered an attractive cost of capital of approximately 5.95% per annum at the average forward price or an implied cost of capital of approximately 2.7% using current consensus gold prices for 2022 and 2023. The delivery ounces only represent approximately 25% of Lalor's forecasted annual gold production in each of 2022 and 2023, and approximately 3.6% of total Snow Lake gold reserves.

Under the revolving credit facilities and note indenture, the gold prepay will not be considered as debt. This is meaningful since the gold prepay adds to our cash balance and will be accretive to our credit facility availability under the recently renegotiated net debt-to-EBITDA covenants.

We are prudently managing the business and the impact of the pandemic through approximately $150 million in incremental liquidity this year from $115 million in cash proceeds from the gold prepaid transaction, a $25 million deferral in Peru's 2020 sustaining CapEx and identified company-wide discretionary and input cost reductions of approximately $10 million.

In addition, our forecasted cash flows are expected to benefit from the Canadian dollar cost structure of our Manitoba operations and the anticipated increase in cash flows from Lalor due to higher precious metals production expected this year based on current commodity prices and foreign exchange rates.

Last month, we executed an amendment with our streaming partner, Wheaton Precious Metals, that extends the target date for mining 4 million tonnes of ore from Pampacancha by 6 months to June 30, 2021. This extension is another example of action we are taking to manage our business and liquidity during this time of uncertainty. The extension delays the potential penalty payment if the minimum tonnes aren't mined, and we were glad to have our long-term partner agree to this extension and continue to believe in our ability to execute and deliver on the development of Pampacancha.

I would like to personally thank Wheaton for this consideration, along with the generous donations to our communities for COVID-related relief.

Now I'd like to walk you through some of the highlights of our recently announced Phase 2 of our Snow Lake gold strategy. We have demonstrated significant value in our Snow Lake gold business, which offers investors an attractive countercyclical hedge to our base metals business in these volatile markets.

Turning to Slide 8. One thing that can be underappreciated is the size of our precious metals business at Hudbay. The Lalor mine and the Snow Lake operations contribute the most exposure with 170,000 ounces of precious metals expected in 2022. In Peru, our precious metals production is expected to more than double by 2022 to 118,000 ounces and 50% of the gold remains unstreamed at Constancia.

Similarly, looking at our resources, we have approximately 5 million ounces of contained precious metals to our account in our portfolio. That amount is not insignificant and is comparable to some stand-alone gold producers.

Another way to view the meaningful size of our gold business is on Slide 9, which shows that by 2022, precious metals are expected to account for 1/3 of our overall revenues, offering investors a unique investment vehicle with significant leverage to copper and growing countercyclical gold exposure.

Slide 10 summarizes the highlights from our announcement on March 30, in which we announced a 35% increase in Snow Lake gold reserves to 2.2 million ounces and extended the mine life to 18 years.

We also released an updated mine plan for Lalor that increased life of mine gold production by 41% compared to the previous 2019 mine plan and more than doubled the average annual gold production to more than 150,000 ounces over the first 8 years after the New Britannia mill is refurbished.

Lalor's gold and copper-gold zones are expected to be processed at the nearby New Britannia gold mill, which capitalizes on existing infrastructure and the $115 million refurbishment cost is a short payback, high-return investment opportunity.

The New Britannia mill is expected to achieve gold recoveries of approximately 93% compared to current gold recoveries of approximately 53% at Stall. This significant improvement in gold recovery unlocks increased reserves and increases the potential for future conversion of resources to reserves due to the increased value per tonne of ore.

The path to our Snow Lake gold strategy has been well planned and executed over the past several years. The first phase of our strategy was announced in February of last year, where we saw a 65% increase in Lalor's gold reserves, which transformed Lalor into a gold mine.

The recently announced second phase demonstrated significant growth in the size of the gold reserve and resources and further increased the annual gold production, as I previously mentioned. Based on the 2020 updated reserve, Lalor will remain a low-cost gold mine with cash costs and all-in sustaining cash costs, net of by-product credits of approximately $480 and $655 per ounce, respectively, over the first 8 years once New Britannia is in production, positioning Lalor in the lowest quartile on the global cost curves as seen on Slide 14.

The New Britannia mill refurbishment activities are underway with detailed engineering approximately 60% complete and time lines on track with the original project schedule. Orders have been placed for long-lead items, and early works construction has commenced, including the construction of the pipeline between the New Britannia and Stall mills. The civil contractor for the flotation building has been mobilized, and construction is expected to commence next week.

Construction and refurbishment activities are expected to continue until August 2021, with plant commissioning and ramp up occurring during the second half of 2021.

The low-cost, high-margin nature of Snow Lake gold and the meaningful annual gold production positions Snow Lake gold favorably compared to other underground gold mines, as shown on Slide 15. And on Slide 16, utilizing the average trading multiples for gold companies and the projected gross margins from Snow Lake gold, you can see that there is incredible value in this gold business.

There remains another phase of potential value creation at Snow Lake gold. The third phase of our strategy will look at several areas of potential upside. We are examining the potential to expand the New Britannia mill beyond the currently planned throughput rate of 1,500 tonnes per day. The mill historically operated in excess of 2,000 tonnes per day, so there remains the opportunity to increase the production, which is compelling, given there remains approximately 1.3 million ounces of gold in inferred resources in Snow Lake and further exploration upside exists both at Lalor and in the regional gold targets.

As part of Phase 3, we are also examining the potential to further optimize the gold and copper recoveries at the Stall mill through the implementation of modern metallurgical technologies. Trade-off studies are underway.

The updated resource model at Lalor includes 4.4 million tonnes of inferred resources, which have the potential to extend the Lalor mine life. You may recall that we use a more stringent approach to resource reporting for underground deposits, and this conservative approach has resulted in a high historical resource to reserve conversion ratio of greater than 80% at Lalor.

As shown on Slide 17 and 18, a new copper-gold lens called Lens 17 was included in the updated inferred resource estimate for Lalor. Lens 17 and other lenses at Lalor, including the copper-gold Lens 27, remained open down plunge and offer opportunities to further expand Lalor's resource base once suitable underground drilling platforms have been established over the next 2 years.

Slide 20 highlights the additional gold deposits -- the additional gold potential at the recently discovered 1901 Deposit. The 1901 Deposit is located approximately halfway between the former Chisel North mine and the Lalor mine at a depth between 500 meters to 700 meters and within the 1,000 meters of the existing haulage ramp to Lalor.

The 1901 Deposit could provide additional feed for the processing facilities in Snow Lake. Since publishing the initial inferred resource estimate in August 2019, we have considered various options to develop the 1901 Deposit, and we have completed a drill program aimed at converting a significant portion of the inferred resources to an indicated category and to define an initial inferred resource estimate for the gold mineralization previously intersected between 2 zinc-rich lenses.

We intend to provide an update on the mineral resource estimates and development options for the 1901 Deposit, with our annual reserve and resource update in March 2021.

In 2020 and 2021, additional technical studies and exploration activities will be conducted to confirm how the Lalor in-mine exploration targets and the regional gold and base metal satellite deposits could be incorporated in the consolidated business plan of the Snow Lake operations.

Having now been with Hudbay for 10 months, I've seen that this company is truly an iconic Canadian mining company. There are 2 key elements that make a quality mining company in my view, assets and people. And here, we actually have both.

I thought it would be worth spending a few moments talking about the strategic advantage that Hudbay offers, which can be summarized in Six Elements, as shown on Slide 21.

First, we have long-life assets located in mining-friendly jurisdictions in the Americas. We have a proven track record of operational excellence and low-cost mines that sit favorably on the global cash cost curves. We have a strong focus on free cash flow generation and prudent capital allocation through prudent balance sheet management and disciplined near-term investment in high return, short payback opportunities within our portfolio.

We have a world-class management team with proven mining industry experience. We've demonstrated strong ESG performance, which is especially important during troubling times like these. And our diversified organic growth pipeline offers investors the unique opportunity of leverage to copper with increasing gold exposure, as we discussed earlier.

Our near-term priorities include refurbishing the New Britannia mill to increase gold production, delivering free cash flow from Pampacancha and drilling Lalor gold to add reserves and extend the mine life.

We are a disciplined, growth-focused company. And as we look to deliver the second stage of growth at Hudbay, our priorities over the medium term will be to unlock value at our Rosemont and Mason properties in the United States, test the Constancia regional exploration targets, optimize value from Snow Lake gold and pursue accretive acquisitions and partnerships that fit our strategic criteria while never losing focus of prudently managing our balance sheet.

Our strong track record in ESG is just as important as our technical track record. Slide 23 highlights a few of our achievements and important initiatives in each of the environment, social impact, health and safety governance areas.

I think it is important that during these times, we remember to recognize the struggles going on all around us. Whether at site, the communities around our operations or the cities we live in, everyone is facing unique challenges right now. We are working closely with the stakeholders within our communities to identify where we can help close immediate gaps and needs.

In Manitoba, the company and our partners have donated to the local food bank, The Salvation Army, the Family Resource Center and the Women's Safe Haven/Resource Services, all who are providing various and much-needed forms of support to families who are struggling during this time.

In Peru, we have donated biomedical equipment and suppliers to regional hospitals, including electric clinical beds with mattresses, metal baskets for hospital bedding, masks and surgical aprons. We have also donated more than 20 tonnes of basic needs, including rice, sugar and noodles to 7 rural communities in Chumbivilcas which will support hundreds of families.

In Toronto, we support multiple charities and have implemented additional matching incentives. I'm also pleased to have our valued partners join us in coordinated relief efforts, including the generous donations from Wheaton Precious Metals to various community initiatives in Peru and Manitoba, and from Altius Minerals to a community service provider in Flin Flon, Manitoba.

In closing, these recent times have no doubt been challenging for all of us. And the way we operate has changed and will continue to change. But the strength of our business model and the continued prudent management of our balance sheet has demonstrated, we have the ability to adapt and overcome these challenges.

We believe we are well positioned with a quality pipeline of assets at several different stages within our portfolio, and this unique pipeline provides significant growth potential. I know you've heard me say this before. But it's more true today than ever. We have the right team and core competencies to execute on our leading growth pipeline, deliver on our strategic priorities and create real value for all of our stakeholders.

So please be vigilant, take care of yourselves and others and stay safe and healthy.

And with that, I'd like to open up the lines for questioning.

(Operator Instructions) Our first question comes from Fahad Tariq of Crédit Suisse.

First on Pampacancha. Can you talk about the time line now to get to the high grade? I know previously, it was end of 2020, and I see the extension with Wheaton. Can you just talk about what that means for accessing the high-grade ore and the timing of it?

Sure, Fahad. Look, obviously, there's a delay that's been associated with the suspension of activities in -- at Constancia due to the state of emergency in Peru. So with a 2-month suspension of activities, clearly, there has been no activity related to either the Consulta Previa process undertaken by the government of Peru, or by our negotiations with the users of the land belonging to the community of Chilloroya.

Once the state of emergency is lifted, we anticipate it will still take some time for the government to remobilize the folks involved in negotiations.

Remember that fund negotiations in interaction with the community. And remember that this interaction is of an intensely personal nature requiring human contact.

So until social distancing protocols are relaxed, it will take some time to complete the Consulta Previa process. At the same time, we will continue with our negotiations with the possessors or users of the land, and we'll continue with that in parallel with the Consulta Previa process.

So I think it's fair to say that we will not be producing or mining Pampacancha until the beginning of next year.

That's helpful. And just switching gears to gold. So it's clear that gold is becoming a larger part of the strategy and composition of revenues, particularly given commodity prices right now. Can you talk about like beyond this year and next year? What's the longer-term strategy with the gold exposure? Would you be open to streaming opportunities or royalty opportunities or doing more prepaid, any color on how gold fits in over the medium term? That would be helpful.

Sure. That's a great question, and it's one that we are more frequently asked than ever before since we announced our updated resources and reserves in March.

Look, we like our increasing exposure to gold. It offers a countercyclical hedge to the volatility of the base metals environment. We believe that there is -- remains enormous value to be unlocked at Snow Lake Gold. And the way that you unlock that value is you deliver the refurbishment of New Britannia and the completion of the related infrastructure between New Brit and the Stall mill.

And only when you have done that and you can demonstrate that you are actually producing at the levels that we say we're going to do, and you have all of these reserves, which will likely be much more than we have today ahead of you. Then you really unlock value and you have the optionality of what you do available to you.

Now I believe we have lots of alternatives available to us with respect to creating and optimizing value at our gold business. We actually don't need to make a decision with respect to that right now because we are a focused razor-sharp on delivering New Brit refurbishment. And during the period between now and then, we will take a really close look at what it means to us. And how it implies our business might look going forward after completion of refurbishment.

Our next question comes from Orest Wowkodaw of Scotiabank.

A couple of questions for me. First of all, with Constancia. So it's great that you got the permission to restart there. Can you give us an idea, are there any constraints that you see in terms of receiving required consumables from, I guess, various distributors and manufacturers within Peru? Like are you ready to basically restart from day 1?

Orest, and also really good questions. So you may remember that right at the point the state of emergency was announced in Peru, we made the decision to suspend operations for one primary reason, and that was in order to preserve our ability to ramp up quickly once the state of emergency was lifted. And a key component of that was to preserve the inventory of supplies that we had on hand. And during the period, the intervening period of our suspension we have, in fact, undertaken a lot of activity in order to ensure that we have more than adequate supplies to allow us to operate for at least a month, during which time, we will be able to make sure that we work on strengthening the supply chain, making sure that we have access to everything that we need.

So in a nutshell, we have everything that we need in terms of supplies to be able to operate for over a month at Constancia.

Okay. That's great. And in terms of the balance sheet, I recognize you renegotiated your debt covenants earlier this year. But at current copper pricing, on my estimates you would still probably have a net debt-to-EBITDA that's above the current thresholds perhaps later this year into early next year.

I guess my question was, can you give us an idea of what definition of EBITDA is being used for the covenant? Is it the adjusted EBITDA? Is it just the gross EBITDA? I'm just wondering how to think about that.

Orest, Eugene here. With respect to the availability under revolver, we renegotiated -- we proactively renegotiated those covenants in Q1 as you'll remember, that was a different copper price environment, it's $2.75 going to $3 rather than $2.75 going towards $2.

Since then, we've bolstered our liquidity by doing the prepay and that gives us additional access to that revolver. In terms of the EBITDA calculation, it is an adjusted EBITDA calculation, and we can take that offline. We do believe that we have more than ample liquidity and the cash balance to sustain our business even into a sub-$2 environment. So we think we have -- we feel confident with the prepay announcement and the resulting effect on the revolver that we can actually operate down to a $1.90 environment without additional liquidity measures.

Okay. So Eugene, I guess the right way to think about it is that your -- you might go through a short period of time where the revolver is not available, but you don't actually think it matters because you have enough cash on hand.

You could interpret it that way. We haven't drawn on the revolver in over 4 years. It's undrawn and available. I think our idea is not to add more debt to the balance sheet here in this time. And so it's a nice rainy day fund that we can drop on, and we expect to have availability. But the goal here is not to add debt to the balance sheet at this time. And that's why we did proactively renegotiate those covenants that allowed us to do that prepay.

Okay. And then just finally, I was anticipating that your environmental provision liability would have decreased this quarter because of the significant mine life extension that you put on Manitoba. Can you give us a sense of why it didn't -- why that liability didn't go down? Is that a timing issue? Or in terms of when that's reevaluated? Or am I missing something there?

The -- actually, the liability -- there's 2 adjustments to that DRO liability. The first one was actually because of lower discount rates, it actually increased liability by $40 million because of the lower discount rates used in that calculation, and that was offset partially by the stronger Canadian dollar, which netted that impact by about half of that. So the increase was net 20, but it -- there are 2 factors to that. And one was discount rate. And the other one, the moderating factor was the Canadian dollar.

Okay. But what about -- I thought just adding the 8 years of mine life to Lalor would push out the closure cost there and the environmental liability. Is that not the case?

It's a complicated calculation. And again, we can take that offline. The 8 years of mine life does extend the closure liability overall for Manitoba. But given the lower interest rate environment, there's a lower discount rate that is calculated that -- as that kind of overwhelm that for this quarter, obviously, as interest rates change over the course of the year, that can be reversed.

Our next question comes from Greg Barnes of TD Securities.

Eugene, a question for you as well. Following up on what -- Orest's question about the credit facility. So I have similar numbers to Orest later this year in terms of the covenants, but does that mean the availability on the line shrinks? Or does the availability disappear completely on the line if you go through the covenants?

It will decrease. And as you know, we -- the second quarter here with Constancia shut down for at least half the quarter, will have a significant impact on our EBITDA. And the way that, that -- the covenant calculation is done is that there's a multiplier effect on the EBITDA that's actually greater than the speed that I can add cash to the balance sheet. So I can't add cash to 4.5x that rate. So it will decrease, but we expect that given our success at negotiating the covenant package earlier this year in a different environment that we will create some availability, but it will likely decrease, but we don't expect to have to draw upon it, until we get to an average copper environment kind of in the $1.90 range.

So I think we've gotten suspendered this to the point where we don't need it. But certainly, we expect we will get increased access with some renegotiation if we need it beyond that $1.90 level.

Okay. Fair enough. And just again, following up on Tariq's question earlier on about the gold business. And in my experience, anyway, gold production within a base metals company just simply doesn't get a gold multiple even a fraction of it. So as you grow the gold business, you're not going to get full value in the market for it in my views, which would imply that probably has to be divested or spun off somehow.

Is that along the lines that you are thinking as well?

I think, as I said to, Tariq, we -- our focus is not so much on delivering future optimization of the asset. It's on actually delivering the value and in the meanwhile, evaluating or taking a look at what opportunities they are for us. There are a multitude of alternatives available to us. And as some of them are what you mentioned. And of course, there are others.

But I think in order to reach that target, we really have to deliver on this project. And delivery in this project involves not only construction and decommissioning activities, but it -- it's dependent on everything that we do on the mine and in our business and how we structure things.

I just think that worrying too much now about how we maximize value post completion of the New Brit refurbishment is a distraction. And so we're just going to continue relentlessly to pursue execution of that strategy. And of course, there will come a point at which we have to decide how best to optimize or maximize value, but we don't have to do that right now.

Our next question comes from Jackie Przybylowski of BMO Capital Markets.

I just wanted to follow-up on a comment, Peter, that you made in your prepared remarks at the beginning about expanding New Brit. Recognize what you just said to Greg about not wanting to be too distracted. But how large could New Brit be in a multiple phase -- subsequent phase expansion, you mentioned 2,000 tonnes per day is where the plant ran in the past. Is that sort of a cap on where you think the plant could run in the future? And can you give us a little bit of a sense on what the timing would be for the way you're thinking about a subsequent phase in New Brit?

Jackie, I'm going to let Cashel talk to that because he'll be more intelligent than I am. But basically, New Brit, in the past, used to run at over 2,000 tonnes per day, but Cashel is more familiar with it.

Yes. The installed grinding capabilities between 2,000 and 2,200 tonnes a day. We have an engineering study commission to be able to evaluate that. Our focus though is on the delivery and execution on the current project, which we have labeled as 1,500 tonnes a day.

I would say, though, that it's an integrated production area, the whole Snow Lake camp. And we have an internal evaluation underway. They're sort of at a prefeasibility level right now, and we look forward to being able to give more detail on it in the future, but the optimization at the Stall mill will add considerable number of ounces also.

So between the 2, we see opportunity to increase recovered ounces out of the Snow Lake reserves in the future. So one criteria we sort of looked at to evaluate whether or not Stall would be a good opportunity is simply the difference between the recovery we get in Flin Flon for gold in our copper concentrate versus what we get in Stall. Stall historically is in and around 55% gold recovery and Flin Flon's in and around 65% recovery.

So we know that there's an opportunity to increase gold recovery there. So I think between those 2 engineering projects that are being managed by Peter Amelunxen and our Vice President of Technical Services; those 2 projects will yield higher opportunity for gold recovery in the future. The throughput at Stall, throughput at New Brit and the increased gold recoveries at Stall. And I would mention, obviously, we're really encouraged by Stall this last quarter with its increased throughput that it demonstrated over the quarter.

It sounds like it could be a couple of years before we see sort of the full potential of the whole camp. Is that fair? Like at least a couple of years?

No. I think the engineering studies would dictate that we would be -- get forecasts and foresight into it probably within the next year, but maybe the execution of it would be phased in with Stall improvements over probably 2021. And then, yes, whatever increases that happened to New Britannia would be implemented and the capital would be allocated after the commissioning of New Britannia.

That's great. That's really helpful. And just another question. I know you mentioned earlier in the call that Constancia is planning to ramp up fairly soon. And it sounds like you can ramp up fairly quickly? Can you maybe give us a little bit of insight or color into your thought process for why the guidance hasn't been updated yet? I guess you said you'll do with Q2 earnings, which is still, I guess, a quarter away from now. What else do you need to see before you're comfortable reissuing that guidance?

Yes, that's a good question, Jackie. Look, I mean, there's still quite a bit of uncertainty in Peru. And that uncertainty really relates to how the pandemic is going to play out and how the government reacts to that. So we spoke -- I mentioned a little bit earlier what we've done with respect to sort of firming up availability of supplies to ourselves for the next month or so. But we really do have to make sure that the supply chain doesn't become a bottleneck.

It has the potential to do that because the complexity of what the government has to do ahead of it and the coordination amongst the various levels of government is pretty intense. And that leads to some uncertainty. So it's very, very difficult for us to be able to predict what uncertainty or uncertainties we'll face in the months ahead of us.

But as we progress through the remainder, the pandemic in the second quarter, we'll get a much better idea of exactly what it's going to take. I believe that we have the most resourceful mining team in the business over there. They have been incredibly, incredibly skillful at making sure that we maintain relationships with all of the communities down the supply chain so that we do have access.

But I believe that they are going to be tested in the months ahead. And while they're being tested, I think it's premature to be able to offer guidance.

Our next question comes from Oscar Cabrera of CIBC.

Best wishes to all your families and yourselves for staying safe. And like Peter said unprecedented times. So I can get back to Constancia, please. If -- Peter, you mentioned in one of the previous questions that you expected to be mining the Pampacancha in early next year. Can you remind me because your growth CapEx for -- before COVID-19 started, you had $70 million for growth CapEx. Was that all Pampacancha? Or can you just remind me what the different parts of that $70 million was?

Yes, sure, Oscar, and thanks for your comments. The CapEx of $70 million is pretty well almost entirely associated with Pampacancha. And there's 2 components of it. The one is the payments to the community for access to the land. And the other piece of it is the actual development costs. So we actually do anticipate spending that capital this year.

The capital that we do not expect to spend all of this year, of course, is a sustaining CapEx, most of which is associated with capitalized stripping. And of course, we've taken a 2-month outage on mining activities, and we're going to be processing stockpile material initially. So we'll probably take -- reduce the sustaining CapEx by roughly 3 months.

Okay. And so the $25 million that you're deferring or that you talked about in your press release, should we then consider that to be spent in the second -- not the second half of this year, but the beginning of next, right? Did you start mining that?

Yes, that's correct.

That's correct. Okay. Great. And then on -- in terms of -- I was wondering if you can give us a sense of the availability on the revolving credit facility. If we get into the scenario that Eugene mentioned the $1.90. How much of the credit facility would you have available to yourselves?

Oscar, the credit availability, the revolver availability is a function of 2 things, both our current debt balance and also -- and EBITDA. And EBITDA is really what you are predicting for the copper price and how much are we going to produce. At -- if we were going to run out this year and Constancia was going to continue to produce it would obvious -- at these prices, would obviously reduce that availability. But again, as we've shown earlier this year, we believe we can get access to some of it by renegotiation with the banks and feel confident that we can do so.

But I think I'd go back to my earlier comments about proactively adding cash to the balance sheet. The best availability is actually cash on your balance sheet, and we've added that without adding debt. So I think -- we think we can attack it that way, meanwhile having the revolver availability as an ultimate backup, if necessary.

Our next question comes from Stefan Ioannou of Cormark Securities.

Great to see the gold strategy unfolding with the prepay and stuff. Just maybe more of a housekeeping question. Just you mentioned as of basically today, the balance sheet has about $370 million of cash on it. Just wondering, presuming that includes the $115 million prepay, have you actually had a chance to sort of do any sort of deep spending on the New Britannia mill yet? Or is that sort of -- I mean will -- sort of weakened since that announcement? Or is that still to come?

Yes. So your presumption is correct. And I'll just make sure that Eugene can confirm that. But we have not done any deep spending on New Brit yet because most of our work has been associated with the engineering and procurement phase, but the spending is about to start. Eugene, any further comments?

Sure. Just the spending this year for New Brit is $80 million. And so I would say, approximately $10 million of that has been spent to date. And so there's a balance of $70 million, and if you want to -- from a modeling perspective. And you're correct, the $170 million approximate balance includes the proceeds from the prepay, which we got last Monday.

Our next question comes from George Topping of Industrial Alliance.

I'm just wondering with the sudden drop in base metal prices. If you have any flexibility at all at either operation to increase the mine grade through the year.

George, look, I think that we're subject to various constraints, of course. But the guide of the mine are pretty, I would say, creative. Whether there is really opportunity to increase grade or not, I think it's limited. And we would -- certainly wouldn't want to make any promises with respect to our ability to do that. But the guys are resourceful and they typically tend to optimize. We'll do what we can. But I would say that to be able to make any predictions associated with increased -- improved grades are not very practical at this point.

George, I would add that in our mine plan this year, we're mining 90,000 tonnes of gold and that's back-end weighted. So given the prevailing gold prices, we'll see some nice tailwind from that as well as the current Canadian U.S. dollar exchange. So there are things inherent in our current -- on our mine plan that will be beneficial given the current environment, which combined with the lower base metals prices, there are other counting counter effects like the higher gold price and the lower Canadian dollar that are offsetting to that environment.

Yes. Yes. Understood. And just -- and then secondly, the worker response to the call back to operations. How is that going? I know it's only a day in, but everybody come back, no problems. Nobody asking for extra money, danger pay, et cetera?

George, we -- so we actually planned for this substantially in advance. And we have incredibly detailed protocols in place in order to manage exposure to the virus. Now all of our employees want to work. And if you can imagine it, Constancia's camp is probably one of the safer places to be in Peru right now. It's -- the accommodations are, there's proper social distancing available there. You don't have dense pockets of population. And we take enormous precautions with respect to hygiene protocols, et cetera. People coming up to site are actually hoteled for 7 days before they come to the site. They are tested for COVID. So people that we bring up to site are COVID-free.

They were also subjected to isolation protocols on site. So everybody wants to come. Now clearly, availability of personnel going forward will be an area that is challenging because everybody is looking for personnel. And it's not so much where the personnel want to come to work, it's whether you have personnel going back to cities as they go on leapfrog through their rotations getting infected. So those are some of the risks that we face.

But we have all the personnel on sites that we need. We mobilize them in advance of being given permission to resume production. So we're in good shape right now.

Yes. And so they all came and no additional demands.

No.

(Operator Instructions) Our next question comes from Brian Lalli of Barclays.

I appreciate you fit me in the hour here. Maybe a couple of follow-ups for Eugene. Again, I apologize a bit of beating a dead horse. But I think part of the issue is obviously, you guys don't report specifically EBITDA. I appreciate that the definition, it sounds like it's been changed from total to net, and we can sort of run the numbers. But is there something around how EBITDA is defined as you think about compliance from that perspective? Obviously, you've gotten a few questions on this. I'd love to expand on and if that's fair, just in terms of understanding how that availability stays even in more dire scenarios? And then I have one follow-up.

The definition of EBITDA hasn't changed and is consistent from when we reported the -- when we did the high-yield offering in 2016. So I just want to be reassured that there's no change in definition. The definition of the revolver covenant has changed, and that is now a net debt to EBITDA rather than the total debt to EBITDA.

Got it. I guess just quickly on that. I mean typically, with these covenants, it's something where -- does it -- is it based on availability? Is it only if you have drawn a certain amount? I guess that's again part of the question I think people have or is if you're above that covenant for some period of time when you have to measure against, does the entire revolver availability go away? Again, we've seen it defined a bunch of different ways in different credit agreements. I think that would be helpful for the group, if there's a way to talk about that.

Sure. It's measured on a quarterly basis. So the numbers that we state in this quarterly release at the $446 million available. So you'll know that the revolver has $550 million in total, and we have $446 million available based on the current calculation, and that will persist till we report next quarter.

Got it. But it is something where if you're above it, it does have an issue in terms of the entire availability, if you were to be above the covenant. Is that actually correct?

The covenant limits, calculates what's available. So depending on where EBITDA goes, and I can't predict where our EBITDA will be at Q2 at the moment especially. Right. Yes. It floats. It's not a -- you have all availability or no availability. It floats. The numbers is a calculated number.

Understood. Okay. And then I guess my second follow-up is, if I may, is just understanding to your point, again, I appreciate the answer on the New Brit CapEx that's left to $70 million. Did you mind working or walking through, excuse me, some of the other kind of key cash flow items that you'd want to make sure we're modeling correctly.

Obviously, the Peru CapEx has been suspended. But I think as people are working through their numbers, we can all figure out our own copper prices and EBITDA. But just making sure we have the right cash outflows as we think through your liquidity, if there's a way to do that at a high level. That's all for me.

Sure. I think we're pleased to reaffirm our Manitoba guidance and the Manitoba guidance of production, operating cost and capital, both on sustaining and growth and are clearly outlined in our guidance from 2 months ago. We are on track on that -- on all those measures. As Peter and Cashel outlined the guidance for Peru is temporarily suspended. We expect to reinstate that by the end of the quarter.

But we wanted to be responsible and prudent and help the analyst community with capital, and we want to highlight that there's an expected $25 million reduction in success. In Peru in addition to that suspension. So I think that's really the guidance that we can provide on Peru at the moment that we expect it to be a minimum $25 million lower. The rest of the spend, as Peter outlined, with respect to Pampacancha, will be dependent on the negotiations and the ramp up of the activities to get Pampacancha in the mine plan. But happy to discuss any other numbers offline if there's some modeling numbers that you're missing.

Sure. That might be great. Appreciate it.

Our next question comes from Matthew Fields of Bank of America.

Everyone, I hope you and your families are doing as well as can be expected. Just a housekeeping one first.

So you ended the quarter with cash balances of $306 million. You got $115 million from the gold prepay and now you're at $370 million. So is that correct in the first 6 weeks of the quarter, you burned about $51 million in cash?

Yes. That's about right. And some of that would relate to the temporary care and maintenance charges in Peru and some of it would relate to spending related to the growth initiatives that we've outlined and have reaffirmed in Manitoba.

Okay, great. And then second, I don't want to beat a dead horse on this revolver and the covenants, but it seems like, especially for a lot of equity investors, covenants are a scary word, and it's going to be something you're dealing with as you go throughout the year. You have got a decent amount of secured capacity right now. Why not do a second lien issue, boost liquidity, you can chip away your '23 maturity a little bit and just not have to deal with this revolver uncertainty and equity investors kind of worried about breaching governance, which you're not the first mining company to get covenant relief, and you won't be the last, but seems to be an overhang, at least based on the questions on this call.

I think we boosted the cash balance, which is more important than revolver availability because it's actually in a bank. And with respect to doing secured debt, that just adds to the debt balance and it reduces our availability. So I think if we were to do a secured offering today, it would be at a higher rate than our current '23. So we've been paying a bunch of fees out to refinance debt in -- for short term and use up secure capacity that we don't need to at this point.

So I don't think that, that would actually improve our liquidity that would actually increase our leverage on a negative basis, and I don't think that that's what investors would like us to do.

Well, you have capacity outside of your revolvers. That's all I'm saying.

We do, but it's still at the covenants, our debt to EBITDA. So if you're adding debt -- new debt to it, it actually reduces the availability that you would have going forward. And all we're doing is paying more interest.

So it's net debt now but okay.

I also note that we -- sorry, operator, I'd also note that we have increased gold production this year, and it looks like gold is flying. So there's a little bit of upside there, too. Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Candace Brûlé for any closing remarks.

Thank you, operator, and thank you, everyone, for participating today. Please feel free to reach out to our Investor Relations team if you have any further questions. This concludes our call. You can now disconnect your lines.